Animal Spirits and Monetary Policy

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Animal Spirits and Monetary Policy

Author Info

Paul De Grauwe ()

Abstract

We develop a behavioral macroeconomic model in which agents use simple but biased rules to forecast future output and inflation. This model generates endogenous waves of optimism and pessimism (“Animal Spirits”) that are generated by the correlation of biased beliefs. We contrast the dynamics of this model with a stylized DSGE-version of the model and we study the implications for monetary policies. One of our main results is that strict inflation targeting is suboptimal because it gives more scope for waves of optimism and pessimism to emerge thereby destabilizing output and inflation.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 2418.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2418

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Find related papers by JEL classification:
D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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Mikhail Anufriev & Tiziana Assenza & Cars Hommes & Domenico Massaro, . "Interest Rate Rules and Macroeconomic Stability under Heterogeneous Expectations," Tinbergen Institute Discussion Papers 09-040/1, Tinbergen Institute. [Downloadable!]
John Knight & Sai Ding, 2009. "Why is Investment so High in China?," Economics Series Working Papers 441, University of Oxford, Department of Economics. [Downloadable!]
de la Torre, Augusto & Ize, Alain, 2009. "Regulatory reform : integrating paradigms," Policy Research Working Paper Series 4842, The World Bank. [Downloadable!]

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